Wednesday, December 31, 2008

May We Live In Interesting Times

A fellow alum friend of mine who works for a custom builder on the east coast presented a very interesting idea in a recent email exchange.

what I don't understand is why the talk of a $1T stimulus package doesn't get evenly divided by the 305M Americans to send a tax-free check for $3k to every man, woman and child? then a typical family of 4 gets $12k

then tell the banks they can't foreclose in Jan/Feb so people have time to get current on their mortgage and debts, but in March the banks have 30 days to get it done

we will quickly find out who really wants to stay in their homes and who doesn't and all the uncertainty is resolved in 90 days to know what debt is good or bad and all the middle-men get taken out of the process so the funds go directly to those who need itmaybe I'm too cynical, but I doubt Congress will come up with any plan half as good, simple or effective

Now that's interesting. And creative. So I replied with what you've read about here, to see how he might fit it all together:

Honestly I think it's because housing is no longer the biggest problem, but rather the $45 TRILLION derivatives market in unregulated legal "betting" in a shadow market of CDS's -- like $45 trillion in bets with no bookie -- and mostly on the balance sheets of major financial institutions. Honestly I think that's why, because you're right, the housing problem alone would be solvable.

And bear in mind that the Alt-A's have yet to ramp up in resets, which will rise in '09 and '10 and could rival the subprime mess. With declining tax revenue & credit downgrades, muni's could be in trouble as well, then watch out all over again........

But with all the side bets representing multiple payouts on the same debt including houses, muni bonds, corporate bonds, etc...... well that's a much bigger problem and one that's very hard to explain to the public, much less congress and even CEOs wrapped up in it.

Add to that the liquidity trap and a growing deflationary environment and it gets really messy really fast.

All I know is that I think that deflationary pressures require inflationary responses. But that could trigger a currency war with China and petrocurrency. At least, however, we know how to kill inflation I think. Ain't nothin gonna be easy for a while.................... [Omitting gratuitous dig at Larry Summers]

So his reply? Fitting, insightful, pithy.

at least we're living in interesting times, right?here's to a better 09